Cobalt prices started to slowly recover this year and have increased more than 40 percent in the second half of 2016.
Human rights reports and political concerns in the top producing country, the Democratic Republic of Congo, as well as China’s stockpiling and major mine purchases to secure supply, were the major factors impacting the market.
For the past years, there has been a rising interest in the critical metal, due to its role in lithium-ion batteries and the announcement of major megafactories opening and starting production in the next few months.
But at this time of the year, investors and market participants are asking the same question–will the cobalt market finally take off in 2017?
INN: At the end of last year what did you expect from 2016?
TN: 2015 was a difficult year for the resource industry with low commodity prices, weak capital markets and investor interest focused on other sectors. A number of high-grade, near-surface deposits of cobalt in the Congo were also being mined by artisanal miners causing a short-term glut and prices to fall below US$10/lb for cathode metal.
We noted that cobalt demand was, at a minimum, tracking its historic two decade compounded annual growth rate of 6 percent, primarily due to accelerating consumption in lithium-ion batteries used in portable electronic devices, electric vehicles and stationary storage cells. With several battery megafactories under construction or announced, including the Tesla Gigafactory in Nevada, we were confident the market would transition into a supply deficit in 2016 or early 2017.
INN: What about your price forecast for cobalt in 2016?
TN: For the past four decades, cobalt metal has typically traded between US$15 and US$30/lb, only dipping below US$10/lb briefly, and occasionally spiking to the US$50/lb level when serious supply issues arise. Consequently, forecasts of a cobalt price recovery above US$15/lb was considered to be a conservative position.
Our view was supported by the shuttering of a number of mines where cobalt is produced as a by-product of nickel and copper mining, resulting in at least 6,500 tonnes of production coming out of the market due to low primary metal prices. There has also been considerable pressure from major electronics companies to secure their raw materials from ethical sources, and reduce materials from artisanal mines associated with child labour and human rights abuses. With geographic concentration of supply in the Congo and China, we felt we would see strong prices in 2016.
INN: Were your expectations correct?
TN: Yes – the cobalt market has tightened resulting in a price increase of more than 40 percent in 2016 and recent transactions above US$14/lb for cobalt metal. Although this did not happen until the second half of 2016, we believe the price recovery is only in its early stages, we expect the supply deficit to prevail leading to much higher prices in 2017 and extending for the foreseeable future.
INN: What had the biggest impact on your commodity in 2016?
TN:The automotive industry is undergoing a transformative evolution from the internal combustion engine to automotive electrification. Tesla has validated consumer interest for a mainstream electric vehicle (“EVs”) with 420,000 preorders received for its Model 3. Tesla has had to accelerate its production target for 500,000 vehicles to 2018 from 2020 to meet this demand. The rest of the automotive industry is following suit. This has implications across the materials sector, impacting everything from oil and copper, to the energy metals needed to produce lithium-ion batteries at the heart of this disruptive transformation.
In addition to automotive electrification, lithium ion batteries are now being manufactured for use in stationary storage, enabling the use of renewable power generation from wind and solar and off-peak charging from the electrical grid.
INN: What was the highlight of 2016 for you?
TN: Rebuilding our team after the end of the resource sector bear market. We are pursuing off-take agreements and project financing to start construction at NICO. After surviving a very challenging 2015 we have started to rebuild the team with key individuals with finance and operations experience, including expertise working in Canada’s far North.
INN: What do you expect for the resource sector in 2017?
TN: We are optimistic that the resource sector recovery that started in 2016 will continue next year. After a devastating 5 year bear market that pushed even the largest companies in the sector to the brink of insolvency, the resource sector has demonstrated a positive turn in 2016 with markets recovering, funds returning to the sector, and M&A picking up. President-elect Trump’s enthusiasm for infrastructure spending is another piece of the mounting evidence for the long-awaited resource recovery.
INN: What is your prediction for the commodity price in 2017?
TN: Our view is that cobalt should be priced closer to the historic long-term average of ~US$20/lb, but it could trade even higher over the mid-term given the confluence of positive factors impacting the market.
More than 14 lithium-ion battery, of which cobalt is an essential raw material, megafactories have been announced or are under construction to meet this demand. In addition, cobalt’s use is also growing in superalloys, cutting tools, cemented carbides, magnets, catalysts, agricultural additives and pigments.Our view is that the cobalt market will need higher prices for longer, as supply struggles to catch up with demand.
INN: What are the major factors that impact cobalt supply?
TN:In terms of supply, cobalt is dominated by two countries that present significant supply side concerns for Western companies. The Democratic Republic of Congo, a politically unstable country, that is responsible for 65 percent of cobalt mine production, and China that is responsible for 52 percent of refined cobalt production.
In addition to risks from geographic concentration of supply, cobalt is also produced primarily as a by-product of copper and nickel mining. Consequently, cobalt does not have the usual supply response from higher prices as the price of copper and nickel determine the economics of these sources.
INN: What excites you the most about 2017?
TN: We are working to secure project financing to start construction at a time the world desperately needs new sources of cobalt that are independent of copper/nickel production, the Congo and China. NICO is well positioned to become a vertically integrated North American source of cobalt chemicals for the lithium-ion battery industry and be part of the solution to help diversify the battery supply chain.
INN: What advice do you give investors most frequently?
TN: Do your homework, look for those macro developments that will impact your investments for years to come and try to ignore short-term noise. Understanding the potential impact of vehicle electrification on the oil industry could be an important factor for most investment portfolios.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Fortune Minerals is a client of the Investing News Network. This article is not paid-for content.
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